Proposed spiking measure focuses on contributions

The Ohio Public Employees Retirement System Board of Trustees in February updated its pension legislation proposal with an anti-spiking measure. Several of our members responded to last week’s blog on this topic with questions about how the new measure would work.

The Board acted to curb the practice of “spiking,” whereby a small number of members receive a substantial increase in pay, usually at the end of their careers, thereby attaining pension benefits that outdistance their contributions. This measure aligns with our goal to eliminate unfair subsidization of one member’s benefits by other members.

Before discussing details of the measure, we must note that it requires approval by the Ohio General Assembly. Thus, we view it as a proposal, although one we believe has merit as a potential blueprint for other public pension funds that wish to limit spiking.

In the past, the Board tried to address the practice of spiking by limiting the final average salary to a member’s three highest years. The benefit cap does not take the place of the final average salary calculation, and one of the Board’s pension redesign proposals is to increase the final average salary timeline from three years to five years.

The basis of the Board’s proposal in February relates to the member’s lifetime contributions, not to FAS. We refer to it as the contribution-based benefit cap. It is meant to reduce benefits that “spike” the system because a subset of the member’s contributions is out of proportion with his or her career-long contributions. The cap is not designed to impact members who receive typical salary increases and promotions throughout their careers.

For example, take two 67-year-old public servants who retire with 32 years of service credit. “Anna” has had steady salary increases to achieve a final average salary of $54,000 at retirement. “Bob,” who was paid at a very low salary for 27 years, then moved to a much higher-paying job for the final five years of his career, also achieved a FAS of $54,000.

In each case under the traditional benefit formula, Anna and Bob would receive a pension benefit of $38,000. However, while Anna has contributed (with interest) $102,000 to her pension over the course of her working career, Bob has contributed only $64,000. (OPERS members pay at least 10 percent of their salary toward their retirement.)

The OPERS anti-spiking proposal would reduce Bob’s annual benefit by using the following formula, which reflects his lower lifetime pension contributions:

Accumulated contribution: The amount that the member paid into to the pension, plus interest.

Annuity factor: An age-based figure that converts the accumulated contribution to an annuity payable over the retiree’s expected remaining life.

CBBC factor: A number that reflects the size of the gap between the formula benefit and the annuitized accumulated contribution.

Annual benefit: The amount the member receives yearly.

In these examples, the annuity factor for a 67-year-old is .08664. The benefit cap factor that the Board selected is six, which means the benefit would be capped if it were to be six or more times the annuitized accumulated contribution.

Applying the anti-spiking formula yields the following results:

Anna’s annuitized accumulated contribution:

$102,000 x .08664 = $8,837

Because Anna’s formula benefit of $38,000 is less than six times her annuitized accumulated contribution benefit of $8,837, she would receive the formula benefit of $38,000.

Bob’s annuitized accumulated contribution:

$64,000 x .08664 = $5,545

Because Bob’s formula benefit of $38,000 is more than six times his annuitized accumulated contribution benefit of $5,545, his benefit would be capped using the formula mentioned above:

$64,000 x .08664 x 6 = $33,270

Bob would receive an annual benefit of $33,270 rather than $38,000.

Using a factor of six for the benefit cap would have affected just 2 percent of age and service retirees from 2006-2010. The Board wanted to address spiking in a way that creates a measured response to the situation and would not negatively affect members that provide adequate contributions over time to help fund pension payments.

In summary, the OPERS-proposed CBBC is a new approach to address spiking because it focuses not on final average salary but on accumulated contributions by the member. It is meant to impact only those members who have a formula benefit out of proportion with their contributions.

It also is important to note that this anti-spiking measure would not be applied retroactively. It would apply only to members who retire after pension legislation becomes law.

The anti-spiking proposal appears to be a great idea. While I can’t speak as to the specifics of the plan, conceptually it seems fair. The example provided shows a fairly small effect of spiking, but imagine a member who works part time for 27 years (remember that only $250 per month gets one full service credit), then takes a full-time job at $60,000 per year. That member could receive an annual benefit of $39,000 despite never earning more than $3,000 per year for 27 of their 30 years of employment!

Obviously a disproportionate increase in a member’s contributable salary can result in a disproportionate increase in his or her pension. As noted the anti-spiking policy would affect only about 2% of age and service retirements. Yet it would clearly strengthen the system as a whole.

To our members requesting an annuity factor chart, it’s likely that these factors will be updated upon passage of pension legislation because of changes to benefits and actuarial assumptions. At that time, members may request pension benefit estimates to determine if they will be affected by a contribution-based benefit cap.

It seems highly unfair that the annuity factors used to calculate benefits would not be available prior to passage of legislation. The contribution based benefit cap seems to be a clever way of getting around FAS calculations. The annuity factor used in your example is for a 67 year old. Try showing members the true effect for those retiring at younger ages.

The board proposals in February would have only affected 2% of age and service retirees from 2006-2010. If the board can come up with these figures, thru the calculations stated it only makes sense to post the annuity factors for the different age groups. The statement that you cannot give these numbers due that these numbers will likely be updated is not very encouraging to individuals that are close to retirement.

Couldn’t you just give us the annuity factor chart that you worked with so that members could at least have a clue as to how this calculation may effect them?
I’m sure everyone realizes that they can’t hold you to the numbers, but at least members could have some peace of mind to have an inkling of how they may be affected.

Where can I find the Annuity Factors to determine if I will be affected by the anti spiking provision (having worked part time several years ago)? The calculator is useless since it requires that one enter one’s annual salary from the first year in the system (in my case, 1979). OSU says the information is on microfiche and not readily accessible and OPERS told me they have it, but can’t share. It seems the using the Annuity Factor is my only recourse and I’m short on time since all information I received indicated that Group A was subject only to loss of the COLA. Please help.

I am confused , in another post you state that “the proposal would not impact those members who receive typical salary increases and promotions throughout their careers”. But in the example above you do appear to punish Bob for getting a promotion after 25 years of service. So the proposal does appear to impact members who receive typical salary increases and promotions throughout their careers based on your example with the Annuity factor

Your concern is valid. But in this example, “Bob” had a career FAS of 54,000, meaning his salary averaged $54,000 over the last five years of his career. That means he contributed to his pension an average of $5,400 per year for those five years. That totals $27,000. We stated that his career contribution was $64,000, meaning he contributed $37,000 over the first 27 years of his career. That’s an average of about $1,370 per year, meaning that his average salary for the first 27 years was $13,700. So the pay increase he received in the new position was nearly four times his then-current salary. That is unlikely to be construed as a typical salary increase due to promotion.

Isn’t using this formula like basing my benefit on all 32 years of service instead of my fas based on my 5 highest years? It seems like you would divide my fas by 32 instead of 5. How is that fair when I will be retiring this November? Who is to say what is a TYPICAL RAISE AND PROMOTION is for your place of employment? This rule should be phased in like all the rest!

This proposal is not akin to a career FAS. As the blog states, “The basis of the Board’s proposal in February relates to the member’s lifetime contributions, not to FAS.” It does not average an employee’s career annual salary to determine the final average salary. Rather, it seeks out salary spikes that would require employee contribution levels that would be “out of proportion” with lifetime contribution levels. It would have applied to 2 percent of retirees from 2006-10.

if you could figure out the effect of those already retired then why can’t you tell us the effect on someone who is 55 to 57 years old and getting ready to retire this year?I I paid into this system for almost 30 years and should not have to have my benefit figured any different than all those before me just because I started my job when I was young,thats why I stayed in public employment.the spiking rule sounds more like an age rule to me,and should be phased in just like all the other changes so those with more than 5 years can have time to adjust,it’s only fair.

Show us the same example only the people are both 55 years old with 32 years of service. This spiking clause is to punish people who have their 30 years in at a younger age; if not show us and we will trust you. How can the retirement board do this to people who are ready to retire this year. If the spiking rule has to be put in the only fair way is to have it in the grandfather rule like everyother change; it’s only fair.

People that will be effected by this proposal include those that worked part-time under OPERS early in their career and then full time in their later years. People in this group include mothers who worked part-time until their kids were raised and then took full-time employment, people who worked part-time in a government position that paid less than they could have made in a part-time private position because of the retirement benefits they expected to recieve, people who left full time private employment to accept full-time government employment at a large drop in salary because of the retireement benefits they expected to recieve. The point is this: These people have made life decisions based on the rules in effect over the last 30 years. An abrupt change in the rules makes these decisons bad decisions for many. I believe a transition plan needs to be applied so that people nearing retirement will recieve the pension they are expecting under the rules which have been in place these many years.

I agree with clyde, because someone did not recieve a promotion until late in their career doesn’t mean they should be discriminated agaist. If they were planning to retire this year and made plans and decisions according to what they would have made on the old system this spiking rule could cause alot of hardship. The spiking rule should be phased in like all the other changes to be fair and give people time to adjust. Why aren’t the current retirements being asked to SHARE THE PAIN? They will still get their 3% the rest of there lives and you’re asking somepeople to maybe take a pension cut just because one rule is not phased in like all the rest. I will be lobbying for this not to pass unless all new rules are phased in!

The implementaion date is totally arbitray. I’m 16 months from retirement. Why should I be treated substantially differently than someone who retired 16 months ago? Do you believe that I can somehow substantially revise my retirement expectations, but retired members cannot? If the issue is really the long term solvency of the system, it should apply to everyone or no-one.

I agree with Clyde. There are people with less than 5 years to retire, 4,3,2 in many cases just months away from retirement. We have worked too long and too hard, under the assumption of certain benefits upon retirement, only to have the rules changed on us as it becomes our turn to retire !!!!

I agree with Clide and Jullie. I too tried to plan my life out, five years ago I learned that opers wanted to rase the minimum earnable salary $250.00 to $ 1,000.00 per mo. The part time job I had paid $900.00 per mo.
So I looked around and came up with a second part time job. This was an on-call when needed job. The two part time jobs togather totaled around $1.200 per mo. The second job last October turned in to a part time every other week full shift. Both part-time jobs will put me around $26,00.00. (Now a new spiking guideline.) I left one other job so I could accept the additional hours. I also beleve a transition plan need to be applied so that people nearing retirement will receive the pension they are expecting under the rules which have been in place these many years.

The anti-spiking provision is fair. Until last October when you doubled your income you did not expect a windfall in retirement. How has your planning for retirement changed in six months? You certainly had not counted on this increase before late last year. Perhaps you should consider working longer to smooth out the inequities. Many people who are eligible to retire have had to make adjustments. My husband planned to retire from his city job at 62. Because of the economic meltdown, losses in deferred comp, furloughs, etc. he realized it would be necessary to work until 65. Life is filled with adjustments. OPERS is responsible for insuring a strong pension program. This will strengthen the program, and additionally diffuse the anger many opponents have to defined benefit plans. Most members have an innate sense of fairness, and most I do not believe would think someone who worked 40 hrs a week
for only three or four years should be entitled to the same benefits as someone who worked full time for their entire 30 years.

So the 98% of people drawing will continue to get a 3% raise every year and those that worked a long time and relied on the promise made to them,but advanced at the end are only 2%. Is gutting the pension of the 2% going to even come close to making up for the approximately 10% raise that the 98% get every 3 years or is this just politically easy to sell.I can’t imagine that the 2% cut will even pay for the increase that the 98% will continue to get, let alone have much impact on the solvency of the system.Has anybody actually crunched the numbers?

In my case, I am 60 years old and have 22 years of service. I have had steady pay increases, no sudden increases in pay. Due to the physical nature of my job I was hoping to make it to 30 years by going part time the last few years. ((I will be 68 by the time I have 30 years). Would a sudden drop in income have the same effect as a sudden increase?

I understand the need for the spiking provision and understand why it is necessary to prevent this practice from continuing.

My question, however, is this:

I am employed by a political subdivision, where like many others, we have suffered due to the economy. For that reason, over the past 3 years, I have received a salary reduction due to revenue shortfalls of anywhere from 10-23%. I am 5 years and 11 months away from having 30 years. My appointing authority is aware of this and has told me that it is her intent to attempt to make up for this loss in salary over the next several years and prior to my retirement (although that target keeps moving) if/when our revenues rebound.

I imagine that any such increase would appear as “spiking” rather than a restoration of lost income or as regular salary increases that would have been received had the funds existed.

This type of legislation needs to be phased in over time. It should not include those who are near retirement and have already made financial decisions based on what we were told our retirement FAS would be (when calculating our projected benefit). It is discrimination against the more senior employees who have 27,28,29+ years already served.

I agree with Clyde, Julie, Bob, Kenny, et al. Who would have known as I near retirement I would now be considered a “spiker” and a “2 percenter”. Whether it’s a five year FAS or a contribution based benefit cap, I agree a fairness change is in order. I do not agree that those of us who have made significant employment decisions based on a plan in place for many years and are nearing retirement should get slammed. After all, this only affects two percent, so why not transition? For me the fact that only two percent are affected is an argument for transition, not against it. This is a huge impact for a few that has a very small impact on the overall system if transitioned. Other than COLA, all proposed changes have been transitioned in three Groups. Why should this be different? Let’s be fair to those about to retire, its the right thing to do.

As a Group A member, who would have thought that as I near retirement I would be referred to as a “spiker” and a “2 per center”. I have made significant employment decisions based on rules in effect for years. Other then COLA, all changes have been transitioned, until now. If this change only impacts 2% of retirees, why not transition? This is a huge impact on a few, with a small impact on the system, if there is a transition. I agree a contribution based benefit cap is fair and reasonable. I also suggest some type of transition is fair and reasonable.

I am wondering why the calculation includes an “annuity factor”. Why does the life expectancy of the retiree have anything to do with their lifetime contributions? It appears to be adding a whole new variable to the equation.

I don’t know but it seems like to me that people have grown a custom to borrowing from the next generation to fund the current generation. I believe you should only get back what you put into the system (i.e. – the contributions plus a reasonable amount of interest) spread out in your retirement years. If you get more than that, then the difference is being taken from the next generation and later on they will want to do the same. It’s a vicious cycle!!!

If OPERS is attempting to make things more fair, then good for them. If OPERS are crunching numbers to make the numbers work in their favor, then shame on them.

Ive spent 25 years carrying a gun on my side , crawling through back yards , chasesing the less desirables through the alleys etc , many years piecing 3 and 4 part time jobs together to get along . My last 5 years full time seem to be one adventure after another with pension changes and so forth . No spike in my salary , other than it spiked into the dumper !!! I cant wait to see the FAS after piecing all my years together . It would be nice to see change , moreso when it affects those comming INTO the system , not GOING OUT of the system . Implement change at a future date , to affect those NEW HIRES . Seems like a good idea ??

I’m 4 years away from being able to retire, working up the ladder from entry level to management at one PERS employer. This anti spiking policy seems reasonable but certainly shouldn’t be imposed immediately but phased in. You can’t tell someone who has worked 20+ years at one employer that the rules are such but now we are going to change them. I’ve had several large jumps in pay going up the ladder and am concerned that I’ll be zinged by this and have no way to even determine if and how much I’d be dinged because the annuity factors and the CBBC factors aren’t being shared. It’s really unfair to the PERS members to propose changing their retirement rules without sharing the specifics.

The grandfathering provisions proposed by our board apply only to age and service eligibility, the benefit formula, final average salary, age reduction factors and the COLA. They do not apply to the proposed spiking measure.

Well I am planning on working 36yrs and have 13yrs to go and will only be 61yrs I am not complaining atleast I will still be broke either way even if I have NO pension from OPERS allowing Present retires enjoying my money that they SPIKED to get double what they really only would have gotten if they worked normal 40hrs NOT forced but knew mmmm I got 3yrs to go I am going totake advantage and soak up ALL the overtime cause it’s given out my Senority (UNION) and even though I called off through my career and ONLY earned $46,000yr Im busting out $100,000 for my last 3yrs so I can drain everyone elses pension who works Overtime but is not compensated cause they are EXEMPT and ONLY UNION employee’s are entitled yea thats fair MOST of you complain try being forced over and having to flex out the time if you can or you just take it for the team guess i will take it for the team it’s ONLY money !

This has been going on for as long as this pension plan has been in existance. It really fits many of our elected servants, and upper management. These are the “trough hogs” that are over burdening our plan.The example given was for the “Average Joe and Joanne” worker. Once again the joe average will take the hit.

Ipreviously had approximately 23 years OPERS and I purchased 5 years of Military service credit. I left OPERS, rolled the pension into Deferred comp – and never touched it. Now I am back in a OPERS job which pays less than I previously made and I want to buy my service credit back. When I buy it back, on what is the repurchase based upon? I understand that after 12 months employment I can buy the Mil service and after 18 months the remainder.

In 2008 I took a new job that basically doubled my salary. Although I’m not planning on retiring for at least another 10 years, my increase is showing up as a spike and capping my benefit. And I’m NOT supposed to feel cheated. I’m sorry if you feel it’s not fair that I’m not “contributing” enough, I earned that promotion and the benefits that go with it.

I stand corrected. I called OPERS to ask them to explain it to me and found out I had an error in my understanding of the calculation results. In truth, I will not lose any of my benefit. Sorry I added to the confusion.